Luxembourg Signs Model 1 FATCA Agreement – Do You Think You Can Get Away With Moving Your Money Before FATCA Kicks In to avoid detection?

Luxembourg, a wealthy country in the European Union with a population of slightly under 550,000, has had a reputation as a tax haven for decades. The Tax Justice Network even ranked Luxembourg the country with the second highest financial security.1 However, tax havens such as Luxembourg are no longer quite so secretive due to the worldwide movement for financial transparency.

Congress created the necessary leverage to persuade financially secretive countries to increase their financial transparency with the United States when it enacted the Foreign Account Tax Compliance Act (FATCA). The purpose of FATCA is to expose U.S. taxpayers guilty of tax evasion and who failed to file Report of Foreign Bank and Financial Accounts (FBAR) forms for their offshore financial accounts. FATCA requires foreign financial institutions to report to the IRS all accounts in excess of $50,000 that belong to U.S. citizens and green card holders, regardless of whether they live in the U.S. or abroad. Any financial institutions that do not comply with FATCA will incur a 30% gross withholding tax on all financial transactions. U.S. taxpayers are required to file an FBAR form (TDF 90-22.1) for every offshore financial account with a balance of $10,000 or more at any time during the calendar year.

In 2013, after several years of resistance, Prime Minister Jean-Claude Juncker finally stated that Luxembourg would join the movement toward financial transparency.2 These words turned into action last week when Luxembourg signed a Model 1 FATCA agreement with the United States.3

So, what does this mean to those of you with financial account(s) in Luxembourg?

The only course of action you can take right now to limit your civil liability and avoid serving jail time is to make a voluntary disclosure. Click here for reasons why you should not do nothing, file the correct FBARs prospectively, or make a quiet disclosure. In short, these options will not protect you from a serving jail time or civil penalties.

However, the worst course of action you could take would be to attempt to physically move your funds out of Luxembourg by stuffing cash into a suitcase or strapping it to your person. Not only will customs U.S. customs confiscate your funds from you, the IRS will consider the act of moving your money an additional badge of fraud if they pursue a criminal case against you. Additionally moving your offshore funds from a bank under criminal investigation to an offshore bank not under criminal investigation could be viewed as an additional badge of fraud as well especially where you are a dual national and make the subsequent deposit under your foreign passport.

Willfully failing to file an FBAR may subject you to three to five year jail sentence per violation. In addition, the most severe civil penalty, 31 USC 5321(a)(5), charges willful violators of the FBAR statute 50% of the balance of the undisclosed account for each year of willful non-compliance. Thus if you have had a foreign account for a multiple of years, you may end up owing several times the balance of your undisclosed foreign account in penalties.

Example:

Assume you have an undisclosed foreign account, with a balance of $1,000,000 in it. Under the FBAR statute, the IRS can charge you $500,000 per year on this account for the willful nondisclosure. If you have held this account for the past six years, the IRS could conceivably charge you a total penalty of $3,000,000 ($500,000 x 6 years).

The most troubling part of analyzing a client’s exposure to civil and criminal penalties related to a foreign account under FACTA is that the IRS has yet to report the number of years they will look back under FACTA reporting. Many experienced tax attorneys, myself included, believe the IRS typically looks back 8 years such that an account transferred as far back as 2006 could potential still show up under FACTA reporting via information sharing agreements between the U.S. and foreign jurisdictions that have signed one such as Luxemburg.

We can help you make a voluntary disclosure under the 2011 Offshore Voluntary Disclosure Initiative (OVDI) before it’s too late. Our competitive advantage is that we are a law firm with all of the functionality of a certified public accounting firm in the tax arena and thus we are a one stop shop for making offshore voluntary disclosures. We have over five years and over 100 voluntary disclosure scenarios under our belt and have a national reputation for excellence in this practice area.

Time is running low before FACTA kicks in in July of 2014. You will no longer be eligible for the 2012 OVDI program once the IRS audits or criminally investigates you which is very likely to occur if a foreign bank reports an undisclosed account to the IRS under FACTA. For more information about the Tax Law Offices of David W. Klasing, P.C., contact our FATCA attorneys today.

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